America's 2 Biggest Problems, and Why Washington Refuses to Fix Them

By Matthew O'Brien

Economists seem to agree on what we need to do to become more competitive over the long-term: (1) better tax policy (2) new infrastructure. What's holding us back? (Hint: See picture below)Reuters

Economists are different from you and me (they're better at math), but they're like average people in one big way: They, too, can't stand Congress.

That might have been the biggest takeaway from The Atlantic's Economy Summit on Wednesday, which included wonky heavy-hitters like Larry Summers, Bob Rubin, Paul Volcker, Gene Sperling, and Douglas Holtz-Eakin. In fact, they might -- incredibly -- hold Capitol Hill in lower regard than the rest of us. After all, Congress is where good ideas go to die. And economists don't like to see their good ideas perish.

Two of their ideas were runaway favorites at the Summit: tax reform and infrastructure investment. There are no free lunches in economics, but tax reform and infrastructure spending are about as close as it gets. Right now we have the worst of all worlds when it comes to taxes: high marginal rates offset by high tax spending combining to bring in low revenue. Lowering rates and eliminating some tax spending should, at least in theory, improve incentives without creating any more red ink. Win-win.

The same is true when it comes to fixing our roads and bridges. The crumbling state of our infrastructure means that there are plenty of projects that would essentially pay for themselves -- and more -- over the course of their lives. If we don't upgrade our infrastructure, eventually that will act as a brake on our growth. We'll struggle to keep competing with the countries that are willing to make big public investments.

If economists from left and right can agree that we need new tax law and new bridges, what's keeping us from making a deal on these lowest of low-hanging economic fruit? The answer is politics. Here are the three biggest things preventing us from getting tax reform and infrastructure spending.

1) Why we don't have tax reform. Everybody wants to simplify the tax code. But the tax code never gets simplified. The single biggest reason is money. Republicans won't stand for tax reform that gives government more money. Democrats won't stand for tax reform that makes government poorer. There's your rock and there's your hard place. But the problem is exacerbated by tax spending.

Economists say they hate tax spending, or tax expenditures -- those loopholes, deductions, and exemptions sprinkled in the tax code. But lobbyists want them, and constituents love them for the same reason academics hate them: Tax spending rewards special groups. The items that cost us the most also tend to have the biggest constituencies. One of the biggies is the mortgage interest deduction, which rewards homeowners with expensive houses. Economists don't like this deduction because it's regressive and it hands out money to homeowners who probably don't need it. But homeowners like it, because it saves them money. Getting rid of these deductions is clearly politically fraught -- there are more homeowners than economists in America -- and neither side wants to move first, for fear of being demagogued by the other side.

2) Why we don't have infrastructure spending. Nobody ever saved money by putting off necessary expenses, Gene Sperling, the chief of the National Economic Council, said at the Summit. He's probably right that eventually we're going to have to repair our worn-down roads and bridges. With record low interest rates, there's no better time to make these investments than when -- after taking inflation into account -- investors are effectively paying the U.S. government for the privilege of lending to them. But Republicans say reducing our deficits should come before new spending projects, and Democrats are nervous to go big on a spending package at a time of anxiety about the federal budget. Despite the admitted merits of shoring up infrastructure, they're not going to sign up for anything that resembles stimulus, especially in an election year.

***

If the answers to our problems don't elude us, the political will does. When it comes to both tax reform and infrastructure spending, there's fairly good consensus among the wonks that disintegrates once you take the argument to Capitol Hill. The first honeymoon months of 2013 could be our last, best chance for an activist, reform-ready government until 2017. If we miss that window, our problems won't wait -- even if our political system is determined to do so.